Summary of Events Leading to the Financial Panic of 1873: The stock market collapse in 1873 came after a building and speculation boom created by easily obtainable mortgages and an ensuing banking crisis. Real estate speculation combined with railroad speculation led the way into the 1873 collapse. Credit was easy, and new financial instruments were created, including new types of railroad bonds whose values no one could be sure of.
The panic in the United States started on Thursday, September 18, Jay Cooke & Company, had a cash crunch. After the Civil War the railroad business was booming. The railroad industry was the biggest non-agricultural employer in the world. Thirty-five thousand miles of railroad track was laid from 1866 to 1873. Due to the rapid growth of the railroad industry, businesses and banks were investing heavily in railroad companies across the nation. Jay Cooke & Company was a prominent house that had essentially financed the Civil War that had a heavy investment in the Northern Pacific Railroad. Jay Cooke's firm had been the government's chief financier of the Union military effort during the Civil War. The firm then became a federal agent in the government financing of railroad construction. Cooke's firm was in the process of financing the construction of a second transcontinental railroad. The problems began for Jay Cooke & Company whenever the Northern Pacific Railroad suspended payments on their notes outstanding. This led investors to pull out of the company immediately causing the price level to plummet.
When one of the largest railroad investing banks of the time, Jay Crooke and Company, declared bankruptcy on September 18, 1873 a financial panic broke out across America. A startling 89 of 364 railroads across the United States crashed into bankruptcy. A total of 18,000 businesses failed within the next two year. By 1876, unemployment had risen to 14 percent. [1]
Some causes of the panic in the U.S.:1. People calling in millions of dollars worth of loans. This causes a tightening of the money supply. The tightening of the money supply causes people to want to purchase goods and unload them as fast as possible. For example, people would purchase crops from the country and try to sell them as fast as possible. 2. Creative business men find ways to lock up money. Sometimes these business men figured out ways to lock down money from the government and keep it from the banks. If these business men would have been successful at holding on to gold and greenbacks that brought on the panic on September 24, 1873, they could have brought down all of Wall Street. 3. No one saw the panic coming, and during the panic they could not figure out why it happened. There have been numerous brokers that were quoted, saying that they did not see it coming. In the book Bulls and Bears of New York, one stockbroker is quoted saying “Everything was easy and buoyant. Stocks were steady, the roads were earning money, and everything was cheerful.”[2]Men who shaped the Panic of 1873: Salmon P. Chase Salmon P. Chase was appointed to be the Secretary of the Treasury during the Civil War. Chase has been accused of making two major economic mistakes during his time of being the Secretary of the Treasury. First, Salmon Chase continued the policy of borrowing instead of taxing. This act impaired public credit and added to the cost of his borrowings. The debt also opened the Pandora’s Box of legal tender paper money.Salmon Chase also helped establish The Bureau of Internal Revenue, which taxed stamps and issued the nation’s first income tax. Salmon Chase was Secretary of the Treasury when the Bureau of Engraving and Printing was establish in 1862. The Bureau of Engraving and Printing issued the Government’s first currency, which was known as the greenback because of its color. The greenback was a legal tender note that was fiat money. Chase disapproved of a fiat currency because he believed it was naturally inflationary, but he recognized it was important in a time of emergency such as the Civil War. The greenback played a vital role in stimulating the economy during the Panic of 1873 and also caused the drastic rise in inflation during the Panic of 1873. Chase resigned as the Secretary of the Treasury in 1864 and was appointed as the Chief Justice of the Court and held the position through the difficult time of the Reconstruction. [3]William A. RichardsonWilliam A. Richardson was the Secretary of the Treasury from 1873 to 1874. One can speculate that although Richardson just served one year, it was a very stressful year. After the Civil War the economy expanded so quickly that banks became nervous and began to call in loans. When the money supply tightened in the summer of 1873, Richardson responded by issuing $26 million worth of greenbacks. Although congress believed the act was unconstitutional, they allowed Richardson to carry through with the increase in the monetary base and the panic was eased. William Richardson was forced to resign as Secretary of the Treasury because of the “Sanborn Incident.” Richardson hired John Sanborn to recover unpaid taxes, but Sanborn kept a lot of what he collected. This led many to believe that Richardson may have been involved in the fraud. Nevertheless, Richardson played a large role in the Panic of 1873 by making the call to significantly increase the money supply when citizens and banks tightened up their spending policies. [4] Ulysses S. Grant Ulysses S. Grant resided as the president of the United States during the Panic of 1873. Grant was in his second term when the U.S. economy was beginning its transition from being primarily agriculturally based to becoming an industrial economy. This transition caused the effects of the business cycle to be magnified. As the depression spread from Europe to the United States, the railroad industry in the United States slowed. Farmers, who were already being squeezed by low prices abroad, began to be hurt by rising railroad transportation costs. The issue of the greenback currency came up again when the depression hit. During the Johnson administration 10 percent of the original $400 million worth of greenbacks had been removed. Grant’s administration released $26 million worth of greenbacks back into the economy, but it only had mild inflationary effects. Farmers pushed for more inflation, but Grant vetoed inflationary bills. President Grant sympathized with the unemployed and even had intentions to build up some public work projects, but Grant believed that when government revenues fall the government should also cut spending. Many people blame the Grant administration for not doing enough to help the United States out of the Panic of 1873.[5]
Companies that failed during the Crisis: Reading Company The Reading Company was originally chartered in 1833 as the Philadelphia and Reading Railroad to build a line between its namesake cities.The Philadelphia and Reading Railroad soon expanded into a variety of other ventures from coal mining to canal and ocean transport operations. In 1871, the P&R had a net worth of $170 million, making it the largest corporation in the world. However, aggressive expansionism and over-extension, would lead the P&R into bankruptcy.Some of the Consequences:
Treasury Secretary, William A Richardson, released $26 million greenbacks in 1873 to help meet demand. The demand was caused by so many banks calling in loans, which caused the money supply to tighten. This helped caused the panic.
Interstate Commerce Act in 1887, and the formation of the Interstate Commerce Commission (ICC)
The Interstate Commerce Act in 1887 was passed on February 4, 1887. This was mainly used to force the rail road industry from having monopolies. This act made the rail road industry the first industry to be regulated by he government. The act created a five member enforcement board called the Interstate Commerce Commission.[6]
The stock market collapse in 1873 came after a building and speculation boom created by easily obtainable mortgages and an ensuing banking crisis. Real estate speculation combined with railroad speculation led the way into the 1873 collapse. Credit was easy, and new financial instruments were created, including new types of railroad bonds whose values no one could be sure of.
The panic in the United States started on Thursday, September 18, Jay Cooke & Company, had a cash crunch. After the Civil War the railroad business was booming. The railroad industry was the biggest non-agricultural employer in the world. Thirty-five thousand miles of railroad track was laid from 1866 to 1873. Due to the rapid growth of the railroad industry, businesses and banks were investing heavily in railroad companies across the nation. Jay Cooke & Company was a prominent house that had essentially financed the Civil War that had a heavy investment in the Northern Pacific Railroad. Jay Cooke's firm had been the government's chief financier of the Union military effort during the Civil War. The firm then became a federal agent in the government financing of railroad construction. Cooke's firm was in the process of financing the construction of a second transcontinental railroad. The problems began for Jay Cooke & Company whenever the Northern Pacific Railroad suspended payments on their notes outstanding. This led investors to pull out of the company immediately causing the price level to plummet.
When one of the largest railroad investing banks of the time, Jay Crooke and Company, declared bankruptcy on September 18, 1873 a financial panic broke out across America. A startling 89 of 364 railroads across the United States crashed into bankruptcy. A total of 18,000 businesses failed within the next two year. By 1876, unemployment had risen to 14 percent.
[1]
Some causes of the panic in the U.S.:1. People calling in millions of dollars worth of loans. This causes a tightening of the money supply. The tightening of the money supply causes people to want to purchase goods and unload them as fast as possible. For example, people would purchase crops from the country and try to sell them as fast as possible.
2. Creative business men find ways to lock up money. Sometimes these business men figured out ways to lock down money from the government and keep it from the banks. If these business men would have been successful at holding on to gold and greenbacks that brought on the panic on September 24, 1873, they could have brought down all of Wall Street.
3. No one saw the panic coming, and during the panic they could not figure out why it happened. There have been numerous brokers that were quoted, saying that they did not see it coming. In the book Bulls and Bears of New York, one stockbroker is quoted saying “Everything was easy and buoyant. Stocks were steady, the roads were earning money, and everything was cheerful.”[2] Men who shaped the Panic of 1873:
Salmon P. Chase
Salmon P. Chase was appointed to be the Secretary of the Treasury during the Civil War. Chase has been accused of making two major economic mistakes during his time of being the Secretary of the Treasury. First, Salmon Chase continued the policy of borrowing instead of taxing. This act impaired public credit and added to the cost of his borrowings. The debt also opened the Pandora’s Box of legal tender paper money.Salmon Chase also helped establish The Bureau of Internal Revenue, which taxed stamps and issued the nation’s first income tax. Salmon Chase was Secretary of the Treasury when the Bureau of Engraving and Printing was establish in 1862. The Bureau of Engraving and Printing issued the Government’s first currency, which was known as the greenback because of its color. The greenback was a legal tender note that was fiat money. Chase disapproved of a fiat currency because he believed it was naturally inflationary, but he recognized it was important in a time of emergency such as the Civil War. The greenback played a vital role in stimulating the economy during the Panic of 1873 and also caused the drastic rise in inflation during the Panic of 1873. Chase resigned as the Secretary of the Treasury in 1864 and was appointed as the Chief Justice of the Court and held the position through the difficult time of the Reconstruction. [3] William A. Richardson William A. Richardson was the Secretary of the Treasury from 1873 to 1874. One can speculate that although Richardson just served one year, it was a very stressful year. After the Civil War the economy expanded so quickly that banks became nervous and began to call in loans. When the money supply tightened in the summer of 1873, Richardson responded by issuing $26 million worth of greenbacks. Although congress believed the act was unconstitutional, they allowed Richardson to carry through with the increase in the monetary base and the panic was eased. William Richardson was forced to resign as Secretary of the Treasury because of the “Sanborn Incident.” Richardson hired John Sanborn to recover unpaid taxes, but Sanborn kept a lot of what he collected. This led many to believe that Richardson may have been involved in the fraud. Nevertheless, Richardson played a large role in the Panic of 1873 by making the call to significantly increase the money supply when citizens and banks tightened up their spending policies. [4]
Ulysses S. Grant
Ulysses S. Grant resided as the president of the United States during the Panic of 1873. Grant was in his second term when the U.S. economy was beginning its transition from being primarily agriculturally based to becoming an industrial economy. This transition caused the effects of the business cycle to be magnified. As the depression spread from Europe to the United States, the railroad industry in the United States slowed. Farmers, who were already being squeezed by low prices abroad, began to be hurt by rising railroad transportation costs. The issue of the greenback currency came up again when the depression hit. During the Johnson administration 10 percent of the original $400 million worth of greenbacks had been removed. Grant’s administration released $26 million worth of greenbacks back into the economy, but it only had mild inflationary effects. Farmers pushed for more inflation, but Grant vetoed inflationary bills. President Grant sympathized with the unemployed and even had intentions to build up some public work projects, but Grant believed that when government revenues fall the government should also cut spending. Many people blame the Grant administration for not doing enough to help the United States out of the Panic of 1873.[5]
Companies that failed during the Crisis:
Reading Company
The Reading Company was originally chartered in 1833 as the Philadelphia and Reading Railroad to build a line between its namesake cities.The Philadelphia and Reading Railroad soon expanded into a variety of other ventures from coal mining to canal and ocean transport operations. In 1871, the P&R had a net worth of $170 million, making it the largest corporation in the world. However, aggressive expansionism and over-extension, would lead the P&R into bankruptcy.Some of the Consequences:
1876, By. "American Experience | Ulysses S. Grant | People & Events | The Panic of 1873." PBS: Public Broadcasting Service. Web. 06 Dec. 2010. [[http://www.pbs.org/wgbh/amex/grant/peopleevents/e_panic.html
Bulls and Bears of New York: with the crisis of the 1873, and the cause, By Matthew Hale Smith, http://books.google.com/books?id=9B-srfQubn0C&printsec=frontcover&dq=bulls+and+bears+of+new+york&hl=en&ei=w1mpTJP3CcWsngen9fimDQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDYQ6AEwAA#v=onepage&q&f=false
< ref>Untitled 1. Web. 06 Dec. 2010. [[http://www.treasury.gov/about/history/pages/spchase.aspx
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The, By. "Domestic Affairs - Ulysses S. Grant - Policy, War, Election, Second." Presidents: A Reference History. Web. 06 Dec. 2010. .